Impact of the Target Firm's ESG Rating on the Bid Premium Paid in M&A Transactions

This study delves into the impact of ESG ratings on bid premiums in M&A deals, analyzing a sample of 413 global deals and 57 deals within the BRICS (Brazil, Russia, India, China, and South Africa) economic bloc. By exploring the impact of both overall ESG scores and their decomposed components, this research sheds light on the relative importance of different ESG factors in shaping bid premiums. Notably, whilst the overall ESG scores have a positive but statistically insignificant effect on premiums, the decomposed governance scores prove to be a significant catalyst of bid premiums in M&A deals. These findings hold true for both the global sample and the BRICS economic bloc, highlighting the relevance of emerging markets in this context. Additionally, this research reveals that the COVID-19 pandemic has had a negative impact on bid premiums in the post-pandemic era. The policy implications of these findings are in two folds: firstly, acquirers should prioritize the governance practices of target firms in M&A deals, and not rely solely on overall ESG scores. Secondly, regulators should encourage greater disclosure of ESG practices by companies to facilitate informed decision-making for acquirers in M&A transactions.